Looking to cut a budget stretched by the Iraq War and the hurricanes in the South, Republicans in the US Congress propose to reduce subsidies to banks that lend money to students for tuition fees.
But bowing temporarily to furious opposition, the Republicans have withdrawn the proposal along with the rest of a $51 billion (£29 billion) package of cuts. They said they would re-examine the ideas before resubmitting them.
House of Representatives Democratic leader Nancy Pelosi said the Republicans realised they did not have the votes to pass the budget reductions. The effect of the student loan cuts was expected to hit the middle class hardest when members of Congress face an election next year.
The Republicans proposed cutting $14.5 billion in subsidies over the next five years to banks that lend money to students - the single largest cut in the history of the student aid programme.
The cuts would result in an increase in interest on the loans from 6.8 per cent to 8.25 per cent, costing the typical student an additional $5,800.
Eighty per cent of American university students receive financial aid. This increasingly comes in the form of loans rather than grants. The average federal grant per student has not been increased for four years, while tuition costs continue to rocket.
Jasmine Harris, legislative director of the United States Student Association, said higher interest rates would raise the barrier to tertiary education for low- and middle-income students. "Loan cuts are a tax on the American dream," she said.
Luke Swarthout, of the State Public Interest Research Groups' Higher Education Project, said: "Rather than helping students out of their financial hole, Congress is asking them to dig deeper."